Emera (TSX:EMA) is up considerably in the past three months. Investors who missed the surge are wondering if EMA stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio targeting dividends and total returns.
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Emera stock
Emera trades near $52.50 at the time of writing compared to $45 in July. Despite the big bounce, the stock is still way off the $64 it reached in 2022 before the Bank of Canada and the U.S. Federal Reserve started to aggressively raise interest rates to get inflation under control.
Inflation is now back at the 2% target in Canada and not far off in the United States. This is why the Bank of Canada and the U.S. Federal Reserve have cut interest rates by 0.75% and 0.5%, respectively, in recent months to try to avoid pushing their economies into a recession.
Emera and other utilities use debt to fund their growth programs. As interest rates rise, the cost of borrowing increases, driving up debt expenses and reducing cash that can be used for distributions. This is why utility stocks took a hit when rates were rising and have started to recover now that rates are coming down. Higher borrowing costs can also force planned projects to be put on hold, slowing growth.
Emera monetized some non-core assets this year in order to strengthen the balance sheet and position the business to pursue the ongoing $8.8 billion capital program. The company sold its interest in the Labrador Island Link in a move that reduced holding company debt by $957 million. In addition, the pending sale of New Mexico Gas Company (NMGC) for US$1.25 billion will further ease balance sheet pressure when the deal closes next year.
Adjusted earnings are down in 2024 so far compared to last year due to higher interest expenses and elevated operating costs. Electric utilities in Canada and the United States drove the bulk of the drop. Gas utilities and infrastructure actually saw adjusted net income rise in the first half of the year compared to 2023, but the gains were more than offset by the weaker performance in the large electric utilities.
Management expects stronger results to occur through the second half of the year.
Dividend
Emera has a good track record of dividend growth supported by rising cash flow from the completion of capital projects. Investors might not see much of an increase in the next couple of years due to the expense pressures and lower earnings resulting from the sale of NMGC. Falling interest rates, however, will free up more cash, and the asset sales should take care of concerns about the balance sheet.
At the very least, the dividend should be safe. Investors who buy EMA stock at the current level can get a 5.5% dividend yield.
Time to buy?
Investors seeking passive income should be comfortable holding EMA stock. The company appears to be through the worst of the recent headwinds and should get back on track in the next couple of years. If you are looking for good yield and a shot at big capital gains, there might be other opportunities in the market that are more attractive right now.
